Q11 Chairman: Could the National Audit Office just comment to me whether these rates of return might have been foreseeable, particularly in the private sector, by the time this contract was undertaken?
Ms Simons: I think the refinancing, the fact that a loan of 20 years could be refinanced, would have been foreseen by the lenders or the investors; it is a usual project finance technique. However, the scale and the speed at which the markets have moved was probably more difficult to predict.
Q12 Chairman: Thank you. If we look at figure 6, page 8, we are now looking at Octagon's debt. You have underwritten it, as I have already mentioned. The debt rose by 53% to £306 million. The question I would like to ask you when you come back is why is the taxpayer underwriting debt used to improve private investors' benefit? Or perhaps you would like to answer that quickly now?
Mr Forden: We are actually not underwriting their debt, what we are doing is we have agreed to make a payment to them in respect of the services we receive and also obviously the excess to the building. That allows them to borrow against that; but we are not actually underwriting the debt.
Q13 Chairman: What is the difference?
Mr Forden: I think one is where we actually have a liability. It is Octagon who actually entered into the agreement with the banks, not the Trust itself.
Chairman: We will stop there and go to vote and we will come back in a moment.
The Committee suspended from 15.37 pm to
15.43 pm for a division in the House
Q14 Chairman: Mr Coates, what lessons do you think the Department has learned from these unusually high returns?
Mr Coates: We have learnt that we need to be aware that these are potential benefits for the private sectors to make; that equally we share the view of the Trust that they are very large sums of money. But equally the contract gave the Trust no right to access to that money and that the large sum of money was shared with the Trust at 30%, and therefore the Trust received a benefit that it would normally not expect to receive.
Q15 Chairman: It received a benefit but it is ultimately responsible, potentially, for these increased borrowings, is it not?
Mr Coates: It is responsible in the sense that it keeps paying a fee to Octagon if it keeps delivering the hospital to standard and to quality. The Trust does not pay any additional costs, any additional fees to Octagon as a result of the refinancing.
Q16 Chairman: They exposed themselves on the additional liabilities, did they not? How much thought do you think was given to this at the time, either in the Department or in the Trust?
Mr Coates: The potential additional liabilities?
Q17 Chairman: Yes.
Mr Coates: We, alongside the Trust, did do a VFM appraisal of the risks against the rewards in terms of the refinancing, which is table 12, and what we tried to look at there was what the likelihood of termination was. My recollection is that we looked at the probability of default based on a typical project financing rated by the likes of Standard and Poor's and rated as of Triple B, and they say that in any year any one project has a5% to 10% probability of defaulting. We currently have 46 operational major PFI schemes, 23 being open for three years continuously. We have had no defaults yet and so all we can say is that 5% to 10% probability looks conservative based on these probabilities.
Q18 Chairman: Mr Coates, would you look at figure 8, page 9? You can see that the shareholders of Octagon have withdrawn £130 million from the project.
Mr Coates: I do.
Q19 Chairman: Do you think that any of that is going to be used for the benefit of this hospital or indeed other PFI hospitals?
Mr Coates: When we have talked to the industry generally about what they propose to do with the fund for refinancing, and I think when other consortia have appeared before various Committees, they have said they would intend to recycle a proportion of that for bidding against further projects and investing in further projects.
Q20 Chairman: That still does not really say a great deal. You may want to send us a note on that1; we would like to have some evidence behind that. Basically you are saying that this £130 million that the shareholders have withdrawn from this project is going to be recycled into other hospitals, are you?
Mr Coates: I said a proportion.
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